GROUP WORK PROJECT # 1 | MScFE 660: Risk Management

GROUP NUMBER: 3193

Sydney Oghenetega Anuyah sydneyanuyah@gmail.com

Aakash Bhattacharya abhattac92@gmail.com

Oluwarotimi John Ogundele oluwarotimi.ogundele@gmail.com

3.1 Macroeconomic Variable

Exchange rates between the Euro and the US dollar is a macroeconomic variable because it represents the relationship between two major world currencies, which has an impact on global trade and the flow of capital. In particular, it can affect the demand for oil and its price.

Oil is typically priced in US dollars, so a change in the exchange rate between the Euro and the dollar can affect the price of oil in Euro terms. For example, if the Euro strengthens against the dollar, it takes fewer Euros to buy a barrel of oil priced in dollars, which can lead to an increase in demand for oil from Euro-zone countries, and an increase in the price of oil in Euro terms. Conversely, if the Euro weakens against the dollar, it takes more Euros to buy a barrel of oil priced in dollars, which can lead to a decrease in demand for oil from Euro-zone countries, and a decrease in the price of oil in Euro terms.

Therefore, exchange rates between the Euro and the US dollar is an important macroeconomic variable to consider when forecasting the price of oil, as it can have a significant impact on the supply and demand dynamics of the global oil market.

Microeconomic Variable

Using the Euro and considering the oil prices in the European nation is really fitting to explain the task at hand.

Stock prices of STOXX Europe 600 is a microeconomic variable because it represents the performance of a specific group of companies within a particular sector. The STOXX Europe 600 is an index of European stocks representing large, mid, and small capitalization companies across 18 European countries, covering approximately 90% of the European market capitalization. The stock prices of these companies are influenced by microeconomic factors such as individual company performance, management decisions, and competition within their respective industries.

Justification The STOXX Europe 600 is a broad-based stock market index that represents the performance of large, mid, and small-cap companies across 17 European countries, including both developed and emerging markets. The index covers a wide range of sectors, including energy, financials, healthcare, and technology, among others. Therefore, it could be a good option to consider in this case because:

Overall, the STOXX Europe 600 could be a good option to consider in this case because it provides exposure to a diversified set of European companies across multiple sectors, including energy.

However, the stock prices of STOXX Europe 600 are also related to macroeconomic variables. The performance of companies within the index is influenced by macroeconomic factors such as GDP growth, inflation, interest rates, and government policies. For example, when the economy is growing, companies are likely to perform well, leading to an increase in their stock prices. On the other hand, a recession can lead to a decrease in company profits and a subsequent decline in their stock prices. Additionally, government policies such as tax rates and regulations can also affect the performance of companies and their stock prices. Therefore, while stock prices of STOXX Europe 600 are primarily influenced by microeconomic factors, they are also linked to macroeconomic variables.

Question 4 As a group, the team writes a dictionary of the data used and a table showing the data, frequency, source, start date, end date, and other relevant fields.

The source of the macroeconomic data is yahoo finance, and we take the start date from January 1st 2010 up till May 5th 2023 with a daily interval. The dictionary and the table is shown below and the keys to identify them.

The source of the microeconomic data is yahoo finance, and we take the start date from January 1st 2010 up till May 5th 2023 with a daily interval. The dictionary and the table is shown below and the keys to identify them.

Step 5

Clean the data. Each person carefully reads Section 4.1 of the paper. Each person is responsible for one part of cleaning the data. Student A will do their part on ALL the data: macroeconomic, microeconomic, and geopolitical. Likewise, Student B will do their part on ALL the data. Likewise, Student C will do their part on all the data. This gives each person a chance to see all the data that was collected. a. Student A focuses on the “extreme outlier” part of cleaning. That is, they will identify values that are extreme compared to the rest of the data. b. Student B focuses on the “bad data” part of cleaning. That is, they will identify values that are wrong, questionable, or duplicated. c. Student C focuses on the “missing values” part of cleaning. That is, they will use a method of imputation, interpolation, or simulation, or some other method, to substitute reasonable values if and when there are missing values.

First, I would like to rename the columns

Remove Outliers is done when the Z-score is greater than 3

The issue of bad data has been addressed through the use of indexing and also missing values have been removed. Using a Monthly average, we can remove the issues of eliminating the data points

Step 6

As a group, all cleaning methods get combined to produce a “sterilized” version of the data. The group collaboratively writes why certain data points/events/periods of time were eliminated from the model’s data.

In our analysis, we encountered situations where certain data points, events, or periods of time were eliminated from the cleaned data obtained from yfinance. This was mainly due to reasons such as incomplete data, data outliers, data inconsistencies, inaccurate data, and the need for data quality control.

The US Energy Information Administration (EIA) data is an essential resource for investigating the global price of oil due to its provision of information on crude oil prices, one of the key variables affecting this price. As the primary source of energy statistics and analysis for the US government, the EIA offers comprehensive data on energy production, consumption, and prices.

Within the framework of the current assignment, the EIA data on crude oil prices can serve as a useful proxy for determining the global price of oil. Given that crude oil is the most widely traded commodity in the world, its price is susceptible to the influence of various macroeconomic and geopolitical factors, including supply and demand dynamics, global economic growth, political instability, and natural disasters.

Through the analysis of the relationship between EIA crude oil price data and other macroeconomic and microeconomic variables, such as exchange rates of Euro to USD and stock prices of STOXX Europe 600, valuable insights can be gained on the factors impacting the global price of oil. This knowledge is of utmost significance for investors, policymakers, and industry analysts seeking to grasp the causes of oil price fluctuations.

STEP 7

Run exploratory data analysis on the data. Each person addresses ALL datasets. a. Student A creates “distributional” plots. b. Student B creates “time series” plots. c. Student C creates “multivariate” plots (distributional and/or time series).

To plot the multivariate plot, we can use the Z-scores to make us draw proper inference from it.

QUESTION 8